In this article, we will look at the 10 Cheap Retail Stocks to Buy According to Analysts. Let’s look at where Dollar Tree, Inc. (DLTR) stands against other cheap retail stocks to buy according to analysts.
Overview of Recent Consumer Buyer Trends and the Retail Sector
On September 18, the Fed cut interest rates for the first time since the Covid-19 pandemic, slashing the benchmark rate by half a percentage point. This brought to a range between 4.75% and 5%. The adjustment aims to relieve consumers and businesses suffering from high borrowing costs and protect the labor market, which was showing signs of slowing. This strategic move by the Fed is interpreted as a sign of relaxation against inflation and a welcome change for businesses and consumers.
Although the impact of the lower interest rates is expected to be substantial, it will likely take time to make its way through the economy. The prospect has, however, strengthened confidence in Americans that inflation will continue to cool, paving the way for good days ahead. According to research by BCG, consumer confidence is already recovering, albeit slowly, across the world and in the US. With people increasingly believing that their personal finances are improving, the sentiment is likely to continue on an upward trajectory if circumstances do not change.
A recent survey by the Center for Customer Insight (CCI) suggests that the extent to which increasing consumer confidence will translate into increasing consumer spending is likely to vary across markets and product categories. The survey reported that the percentage of respondents with personal finance concerns dwindled from 39% in 2023 to 26% in 2024. These trends are significant for retailers, as the financial health of consumers in the country affects the categories and services they prioritize when spending money.
The Future of the Retail Sector
According to the WTW Global Retail Survey for 2024, around 52% of retailers this year expect increased profitability in the coming two years. In addition, approximately 48% of retailers are looking to leverage artificial intelligence in their operations to offer their customers a personalized and efficient shopping experience. However, with more and more businesses turning towards AI, around 43% of the respondents voiced concerns about high cybersecurity risks likely to arise with increasing reliance on new technologies. Despite the risks, a majority of retailers are incorporating AI into their operations, streamlining and expediting their functioning.
On June 24, Simeon Gutman, an analyst at Morgan Stanley, joined CNBC’s “The Exchange” to discuss the impact of tech and AI on retailers and how these companies are leveraging technology to boost profit margins. Here is what to say about retail companies in this respect:
“Walmart’s the one that comes to mind the first…, you’re hitting the nail on the head with several of these aspects of tech diffusion, and on top of it, they’re gaining market share in terms of tech diffusion. AI is easily one of them, big scale, lots of data, a lot of opportunity to go through their data and enhance both the frontend of their business, drive more sales to customers, make things easier, and improve the backend.”
According to Gutman, big-box retailers are taking the lead in infusing tech and AI into their internal operations, increasing profit margins and streamlining operations. Such innovative trends may allow the retail industry to bounce back in the market, taking the lead and leading the change.
Our Methodology
We first consulted stock screeners from Finviz and Yahoo Finance, along with online rankings, to create an initial list of 15 publicly traded retail companies with a forward P/E ratios of less than 23 (the broader market is trading at a forward P/E of 23, as per data from WSJ). From this list, we selected the 10 stocks with the highest analyst upside potential as of September 23, 2024, and used that as our ranking metric.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
10 Cheap Retail Stocks to Buy According to Analysts
Dollar Tree, Inc. (NASDAQ:DLTR)
Forward P/E: 13.73
Analyst Upside Potential as of September 23, 2024: 15.59%
Number of Hedge Fund Holders as of Q2 2024: 38
Dollar Tree (NASDAQ:DLTR) is a discount variety store retailer based in Virginia. It operates more than 15,000 stores across the country, and is supported by a logistics network spanning 24 distribution centers across the country. The company holds a significant competitive advantage due to its highly discounted prices on an elaborate array of merchandise offered in convenient neighborhood stores. Dollar Tree (NASDAQ:DLTR) is running on a strong, differentiated business model, supported by its long-term strategy of multi-price expansion and store growth acceleration.
To navigate the uncertain economic backdrop, the company is focusing on factors within its control and rolling out key transformation initiatives. Its multi-expansion strategy resonates with its audience, with the 1,600 stores converted into its newest in-line format and seeing a substantial sales lift. Comps for these 1,600 converted stores were up 4.6% in Q2 2024, around 0.5% less than those in other formats in the same quarter.
Dollar Tree (NASDAQ:DLTR) also reopened 85 of the recently acquired former 99 Cents stores in Q2, with plans to open 20 additional stores immediately. The remaining 56 stores are expected to reopen by the end of 2024. Since these 99 Cents Only stores are located in high-quality, proven stores in strong markets, they are expected to boost the company’s profitability and bring great growth potential. Expanding its footprint across the Southwest and California also marks a notable achievement for the company.
Dollar Tree (NASDAQ:DLTR) added 2.8 million new customers to its consumer share over the past 12 months, with the best-performing categories split across discretionary and consumables, including apparel, beverages, health OTC, and personal care. The company is also making considerable progress in its modernization initiatives, with its new warehouse management system going live at its first two DCs. Two more are slated for early 2025. It has transitioned more than 9,000 stores to its network infrastructure, supporting business operations by enhancing in-store Wi-Fi access for associates and improving Internet connectivity.
Here is what Madison Investors Fund stated regarding Dollar Tree, Inc. (NASDAQ:DLTR) in its Q2 2024 investor letter:
“Dollar Tree, Inc. (NASDAQ:DLTR) underperformed following a plethora of concerns: weakness surrounding the low-end consumer, pricing actions by peers, and disappointing sales at the core Dollar Tree banner. In addition, the significant news that management has placed the struggling Family Dollar banner under strategic review was received skeptically by investors. Despite these concerns, we are encouraged by the long-term prospects of the multi-price initiatives at the Dollar Tree banner and are entirely supportive of management’s effort to enhance value by evaluating alternatives for Family Dollar. We also see a comfortable margin of safety in the shares at the current price.”
Overall, DLTR ranks fifth among the 10 cheap retail stocks to buy according to analysts. While we acknowledge the potential of DLTR as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DLTR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.